The journey to retirement can be long and might even seem arduous. Whether it’s you or your clients building a decades-long career to secure a dream retirement, the hard work doesn’t stop when work finishes.

Pension decumulation can be just as tough as the accumulation stage and the effects of poor management can be long-lasting. 

That’s why, at Boolers, we’re on hand to help during both stages. And it’s also why The Pensions Regulator (TPR) recently set out its five principles for “good” pension decumulation.

Keep reading for your look at these important principles. 

But first, what is pension decumulation, why does it matter, and what factors should your clients consider? 

3 key reasons why pension decumulation matters

Decumulation is the stage in your client’s financial journey when they begin to liquidate pension assets and use them to pay for their retirement.

Carefully accumulated pension wealth is designed to: 

• Provide a desired lifestyle for life
• Cover potential later-life care costs
• Factor in an inheritance to loved ones.

That’s why getting this stage right is so crucial. Here are several important factors to consider.

Fluctuating expenditure and lifestyle

Your clients will need to think about the lifestyle they intend to live, and the fact that their expenditure won’t be stable throughout retirement.

Outgoings might be heavier in the early, active stage of retirement and in later life if care is required. Expenditure in the middle years of retirement, in contrast, might be lower.

Life expectancy and later-life care

Longevity is also a key consideration. While UK life expectancy is generally rising, so too is the number of years we can expect to live in poor health. 

That makes it important to plan for a three- or four-decade retirement. But it also highlights the need for a care plan and a contingency for what happens to the money if care isn’t needed. 

Professional financial advice can help your clients here.

Choosing the right retirement option

Once your clients know the type of post-work life they want to lead, they’ll need to match their retirement choices to that lifestyle.

Big ticket items like travel and house renovations might require flexibility or the larger injections of cash that lump sums provide. On the other hand, the regular and stable income of an annuity might be more appropriate.

Either way, your clients must shop around. They’ll also need to remember that wider economic factors can affect pension decumulation.

High inflation can shrink the buying power of a regular income while falling markets can mean they need to sell more units to realise the same income amount.

5 key principles for “good” pension decumulation

The switch in recent years from defined benefit (DB) to defined contribution (DC) pensions means that decumulation is increasingly important. This is especially true since the introduction of Pension Freedoms and auto-enrolment.

With this in mind, Nausicaa Delfas, chief executive of TPR believes that a shift in focus is needed. This change could include greater support and an improved understanding of what “good” pension decumulation looks like.

Delfas has outlined five key principles:

Principle #1: All savers deserve value for money

Advice can help your clients maximise the value of their hard-earned pension savings, taking a holistic view across the whole of their retirement and finances.

Value for money means shopping around for the best annuity rates, helping your clients manage their flexible withdrawals, and even looking into the tax-efficient potential of consolidation.

Principle #2: All savers should be helped with decision-making

Delfas also believes, as Boolers do, that pre-retirees need support when making retirement decisions. 

By being present throughout the retirement journey we can help clients to put plans in place that align with their goals. This leaves them best placed to make the right at-retirement decisions for them. 

Through guidance at all stages, we can provide regular reassurance and updates.

Principle #3: Schemes should put the saver at the heart of decumulation 

Our clients are at the heart of every plan we put in place, decision we make, and piece of advice we offer.

This helps ensure that each client is treated as an individual with their circumstances and aspirations. This provides a sense of control while empowering clients.

Principle #4: The market must innovate to provide genuine choice for savers 

Pension Freedoms legislation has already made huge inroads into increasing flexibility for retirees. 

The option to mix and match a stable, regular income with flexible withdrawals allows clients to pick and choose the combination that works best for them.

Principle #5: Schemes should provide wrap-around and personalised support in the lead-up to and during decumulation and in post-retirement

Delfas concludes her principles with another staple of Boolers’ financial planning strategy. 

She states that clients should be entitled to wrap-around and personalised support in the lead-up to and during decumulation and in post-retirement.

Get in touch

If you have clients who would benefit from help managing their pension decumulation get in touch. Email enquiries@boolers.co.uk or call 0116 240 7070.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. 

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.